After a reasonable start to the year, rising bond yields, global trade tensions and a strengthening US dollar, among other factors, placed pressure throughout October on equity markets abroad and here at home. In response, many markets including the ASX have given up all their gains for the year with only a couple of months remaining in 2018.
As it stands, we feel the market is in a ‘feeling-out’ period where it is determining whether it’s comfortable with higher yields as a reflection of a strong and robust economy. Or whether higher yields are a sell signal because earnings will be discounted at a higher rate.
When yields rise sharply as they have over the course of 2018, investors essentially reassess how much risk they are willing to take on their investments. In response, what we have seen is evidence of investors reducing their exposure to perceived ‘riskier’ and ‘overvalued’ sectors such as technology.